Research Discussion Papers, Bank of Finland
The Time-Varying NAIRU and Potential Output in Finland
() and Jan-Markus Viikari
Abstract: This study presents statistical estimates of
Non-Accelerating Inflation Rate of Unemployment, or NAIRU, and potential
output in Finland. The estimates are obtained by applying the structural
time series/unobserved components method to quarterly data on inflation,
rate of unemployment, aggregate production and a number of auxiliary
variables covering the period 1982:1 - 1996:4. According to the basic idea
underlying these methods, noisy estimates of the unobserved NAIRU and
potential output can be obtained from the so-called measurement equations,
which in the present study are provided by the now standard specifications
of the Okun's law and Phillips curve. To pin down the dynamics of the
unobserved components the study assumes that they are driven by stochastic
trends. One of the main features of the method applied in the study is the
system estimation of the NAIRU and potential output time seria along with
other parameters. According to the results NAIRU and potential output
variate in the long run less than the actual unemployment rate and output.
Until the latter part of 1991 NAIRU has been above the unemployment rate.
After this the NAIRU has remained clearly below the unemployment rate
although it has risen trendwise to a level between 8 and 9.5 per cent in
Keywords: NAIRU; potential output; Phillips curve; structural time series models; unobserved components method; (follow links to similar papers)
30 pages, April 15, 1998
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